What may come after Bank of Japan finally scraps negative interest rates?

TOKYO, March 22 (Xinhua) -- After a two-day policy meeting through Tuesday, the Bank of Japan (BOJ) decided to end its negative interest rate policy by guiding short-term rate to a range of 0 to 0.1 percent, and scrap its yield curve control policy.

The central bank's first rate hike in 17 years marks the first step in a series of moves toward normalizing Japan's 11-year-old unprecedented monetary easing policy, said analysts.

WHY RATE HIKE NOW

The BOJ embarked on massive monetary easing in 2013, aiming to put an end to Japan's chronic deflation. In 2016, the central bank set short-term interest rates at minus 0.1 percent and introduced a yield curve control program, under which the central bank purchased large quantities of Japanese government bonds to keep long-term interest rates at around zero percent to maintain accommodative financial conditions.

As the prolonged implementation of monetary easing has brought side effects to the fore, BOJ Governor Kazuo Ueda has been seeking to normalize monetary policy since taking office in April last year.

The BOJ has set a goal of achieving an inflation rate of 2 percent in a sustainable and stable manner. The central bank's policy overhaul on Tuesday is also based on the judgment that the inflation target is "in sight."

Currently, prices in Japan continue to increase. The consumer price index rose at a rate of 2 percent or more for 22 consecutive months through January this year. The reason for this increase has shifted from a sharp rise in energy and other import prices to a rise in service prices.

However, Ueda said that there is still a distance from achieving the inflation target, and after ending the negative interest rate policy, Japan will not immediately enter a stage of aggressive rate hikes given the current environment.

ACHIEVING INFLATION GOAL?

Japanese newspaper Tokyo Shimbun said getting rid of deflation should mean that prices continue to rise, businesses benefit from it, wages continue to increase, consumption picks up significantly, and prices stop falling.

Local media and experts believe that despite continued price rises and nominal wage hikes since last year, it is still far from achieving a healthy wage-price cycle.

According to the Ministry of Health, Labor and Welfare, inflation-adjusted real wages in Japan fell for a second consecutive year in 2023, down by 2.5 percent, and as of January this year, real wages have decreased year-on-year for the 22nd straight month.

The data showed that salary gains continued to fall short of outpacing inflation, and private consumption will be significantly suppressed.

Meanwhile, private consumption, which accounts for more than half of Japan's economy, fell for three consecutive quarters, down by 0.3 percent in the fourth quarter of 2023, according to the cabinet office.

Data also showed that since last year, sales of chicken in Japan have surged while beef sales have plunged as people opt to buy cheaper consumer goods.

It is too early to talk about escaping deflation at this stage, said Takashi Kadokura, an economic commentator.

There is no virtuous cycle in Japan in which real wages rise, consumption increases, and strong demand drives up prices. If inflation is not driven by factors such as strong domestic demand and rising wage costs, the risk of the Japanese economy slipping back into deflation remains, Kadokura said.

IMPACT ON ECONOMY

As the central bank pledged to continue to maintain accommodative monetary conditions through the purchase of government bonds and other means, financial markets reacted coldly to the central bank's latest decision.

On Tuesday, the U.S. dollar topped the 150 yen line in Tokyo on yen selling, while the Tokyo stocks continued their rally, with the benchmark Nikkei index returning to above the 40,000 threshold.

In the short term, the BOJ's interest rate hike could increase the debt burden of the government, enterprises and individuals, and increase the number of corporate bankruptcies, analysts said.

However, in the long run, raising interest rates will help increase national savings income and curb the outflow of wealth caused by the excessive depreciation of the yen, and improve corporates' awareness of efficiency, competition and innovation to allow human resources to be more concentrated in competitive industries and enterprises, they said.

Ueda reaffirmed on Thursday the central bank's commitment to supporting the economy by maintaining accommodative monetary conditions for the foreseeable future.

Even if the BOJ pushes forward monetary policy normalization, interest rate increases will be limited, said Kiuchi Takahide, an economist at Nomura Research Institute.

With the Japanese economy having become much less sensitive to interest rates, the central bank's policy adjustment is unlikely to significantly change the current state of the Japanese economy, Takahide said.